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    Chapter 2

    Information Systems for Competitive

    Advantages

    This chapter will review competitive forces and competitive information systems strategies forgaining competitive advantages, explain concepts of value chain, value web and business eco-

    systems & co-opetition, and discuss innovation strategy.

    2.1 Competitive Strategies

    Gaining competitive advantage is critical for organisations. Baltzan and Phillips (2010,

    p. 16) define competitive advantage as a product or service that an organizations cus-

    tomers value more highly than similar offerings from its competitors (in other words, youhave something useful (i.e. products, services, capabilities) that your competitors do not

    have). Competitive advantages are typically temporary as competitors often seek ways

    to duplicate the competitive advantage (Baltzan & Phillips 2010, p. 16). In order to stay

    ahead of competition, organisations have to continually develop new competitive advan-

    tages. This section discusses how an organisation can analyse, identify, and develop com-

    petitive advantages using tools such as Porters Five Forces, three generic strategies, and

    value chains.

    Michael Porters Five Forces Model is a useful tool to assist in assessing the competition

    in an industry and determining the relative attractiveness of that industry. Porter states that

    in order to do an industry analysis a firm must analyse five competitive forces (Baltzan &

    Phillips 2010, p. 17):

    Rivalry of competitors within its industry

    Threat of new entrants into an industry and its markets

    Threat posed by substitute products which might capture market share Bargaining power of customers

    Bargaining power of suppliers.

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    28 Managing Information Systems: Ten Essential Topics

    To survive and succeed, a business must develop and implement strategies to effectively

    counter the above five competitive forces. OBrien and Marakas (2011, p. 49) suggest

    that organisations can follow one of five basic competitive strategies, which are based onPorters three generic strategies of broad cost leadership, broad differentiation, and focused

    strategy. The five competitive strategies are: cost leadership, differentiation, innovation,

    growth, and alliance. Meanwhile, information systems could be a critical enabler of these

    five competitive strategies (see Table 2.1).

    Table 2.1: Competitive Strategies & Roles of Information Systems

    Competitive

    StrategyRoles of Information Systems

    Cost

    Leadership

    Organizations can use information systems to fundamentally shift

    the cost of doing business (Booth, Roberts & Sikes 2011) or reduce

    the costs of business processes or/and to lower the costs of customers

    or suppliers, i.e., using online business to consumer & business to

    business models, e-procurement systems to reduce operating costs.

    Differentiation

    Organizations can use information systems to develop differentiated

    features or/and to reduce competitors differentiation advantages,

    i.e., using online live chatting systems and social networks to better

    understand and serve customers; using technology to create informe-

    diaries to offer value-added service and improve customers sticki-

    ness to your web site/business(Booth, Roberts, and Sikes 2011); ap-

    plying advanced and established measures for online operations to

    offline practices (i.e., more accurate and systematic ways of measur-

    ing efficiency and effectiveness of advertising) (Manyika 2009).

    Continued on next page

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    Information Systems for Competitive Advantages 29

    Table 2.1 continued from previous page

    Competitive

    Strategy Roles of Information Systems

    Innovation

    Organizations can use information systems to identify and create

    (or assist in creating) new products and services or/and to develop

    new/niche markets or/and to radically change business processes via

    automation (i.e., using digital modelling and simulation of product

    design to reduce the time and cost to the market (Chui & Fleming

    2011). They also can work on new initiatives of establishing pure

    online businesses/operations. At the same time, the Internet and

    telecommunications networks provide better capabilities and oppor-

    tunities for innovation. Combinational innovation and Open inno-

    vation are two good examples. There are a large number of compo-

    nent parts on the networks that are very expensive or extremely dif-

    ferent before the establishment of the networks, and organizations

    could combine or recombine components/parts on the networks to

    create new innovations (Manyika 2009). Meanwhile everyone isconnected via personal computers, laptops and other mobile devices

    through cabled Internet or wireless networks or mobile networks,

    there are plenty of opportunities to co-create with customers, exter-

    nal partners and internal people.

    Growth

    (including

    mergers and

    acquisitions)

    Organizations can use information systems to expand domestic

    and international operations or/and to diversify and integrate into

    other products and services, i.e., establishing global intranet andglobal operation platform; establishing omni-channel strategy to

    gain growth(omni-channel strategy looks at leveraging advantages

    of both online (or digital) and offline (or non-digital) channels)

    (Rigby 2011).

    Strategic

    Alliance

    Organizations can use information systems to create and enhance

    relations with partners via applications, such as developing virtual

    organizations and inter-organizational information systems.

    (Source: Developed from OBrien and Marakas 2011, pp. 4951; Manyika 2009; Chui and Fleming

    2011; Rigby 2011; Booth, Roberts, and Sikes 2011; The Authors Own Knowledge)

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    30 Managing Information Systems: Ten Essential Topics

    On top of these five basic strategies, companies can also adopt other competitive strate-

    gies facilitated by information systems to shape their competitive advantage. Some exam-

    ples include (OBrien & Marakas 2011, p. 5052; Chui & Fleming 2011; The AuthorsOwn Knowledge) are:

    Locking in customers or suppliers by enhancing relations and building valuable new re-

    lationships via customer/partner relationship management systems/ applications (i.e., pro-

    viding a banks customers with multiple touch points via telephones, Internet, fax ma-

    chines, videos, mobile devices, ATMs, branches, the banks agents).

    Building switching costs via extranets and proprietary software applications (i.e., Ama-

    zons user-friendly and useful B2C website and Alibabas B2B platform) so that a firms

    customers or suppliers are reluctant to pay the costs in time, money, effort, and bear the

    inconvenience of switching to a companys competitors.

    Raising barriers to entry through improving operations or/and optimizing/flattening or-

    ganizational structure by increasing the amount or the complexity of the technology re-

    quired (i.e., Googles search engine and P & Gs digitization strategy/efforts-P & G is

    working on digitizing almost every aspect of its operation to make it the worlds most

    technologically enabled firm).

    2.2 Value chain

    Another important concept and tool that can help a business identify competitive advantage

    and opportunities for strategic use of information systems is Porters value chain model.

    The value chain approach views an organisation as a chain, or series, of processes, and

    it classified an organizations activities into two categories: primary activities (i.e., in-

    bound logistics, operations, sales & marketing, customer service, outbound logistics) and

    secondary/support activities (i.e., administration, human resources, technology, procure-

    ment) (OBrien & Marakas 2011, p. 56; Laudon & Laudon 2012, p. 135). The value chain

    helps an organisation determine the value of its business processes for its customers.

    The model highlights specific activities in the business where competitive strategies can

    be best applied and where information systems are most likely to have a strategic impact.

    By creating/adding value and thus creating competitive advantages, information systems

    could contribute to each part of an organizations value chain and extended value chain (in-cluding interactions/ties with external partners and strategic alliances). By leveraging on

    the Internet technologies, organizations could also create a value web (Laudon & Laudon

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    Information Systems for Competitive Advantages 31

    2012, p. 137) or a hub structure, both of them look at improving the efficiency and the

    effectiveness of value chain and supply chain by digitally connecting customers, suppliers,

    partners; by reducing the information gaps/errors along the chain (especially demand andsupply); and by bettering communication, cooperation and collaboration.

    2.3 Business Eco-systems and Co-opetition (Competition & Cooperation)

    In todays digital era, firms need to have a more dynamic view of the boundaries among

    firms, customers, and suppliers, with both competition and cooperation occurring with

    members of the industry set (more than one industry) (Laudon & Laudon 2012, p. 140).

    For example, car, plane, bus, train are in the same industry set of transportation. Another

    example is the way that traditional universities are now competing with online learning and

    other training and development firms.

    Business eco-systems refer to loosely coupled but independent network of suppliers,

    distributors, partners and strategic alliances (Laudon & Laudon 2012, p. 139). An excellent

    example of business eco-systems is the mobile Internet platform; industries such as mobile

    device manufacturers, software vendors, online services firms, Internet services providers

    are working together. Meanwhile in order to stay ahead of the competition, organizations

    need to actively establish their business ecosystems. For example, looking at the competi-

    tion between Apple and Sumsung, it can be said that Samsung is still very much a hardware

    player while Apple has been developing its ecosystem and venturing into areas of hardware,

    software, service, content and customer support in recent years (Wagstaff 2012). So who

    is doing better now?

    Another term reflects the same meaning is Co-opetition. In order to succeed in to-

    days highly competitive market, firms also should practice co-opetition since not all

    strategic alliances are formed with suppliers or customers. Co-opetition is a strategy

    whereby companies cooperate and compete at the same time with their competitors, com-

    plementors (i.e. hardware and software businesses), customers, suppliers (Pearlson &

    Saunders 2004, p. 52). Through co-opetition, the best possible outcome for a business can

    be achieved by optimally combining competition and cooperation. A good example is Co-

    visint (http://www.covisint.com/), which is the auto industrys e-marketplace and is

    backed up by competitors of GM, Ford, Daimler Chryslers and others. Benefits of Covisintinclude speed in decision-making, reduced supply chain costs and greater responsiveness

    in serving customers.

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    32 Managing Information Systems: Ten Essential Topics

    The downside to co-opetition is that it may be viewed as collusion. Many countries

    have legislation in force to deter anti-competitive or price-fixing practices. The Australian

    Competition & Consumer Commission (ACCC) in Australia has imposed huge monetaryfines on companies and the directors of those companies found guilty of anti-competitive

    or price-fixing practices.

    2.4 Innovation Strategy

    2.4.1 Open innovation strategy

    Open innovation emphasizes an organizations efforts of engaging and collaborating withexternal sources and its partners in its innovation process (Lichtenthaler, Hoegl & Muethel

    2011). The telecommunications networks and Internet technologies have made the open

    innovation more appealing to organizations. Open innovation strategy has been adopted by

    many most innovative companies in the world. For example, 3M has been very successful

    in developing smart products via its open innovation approach-10,000 R &D people in 73

    locations from 63 full-scale operating businesses across dozens of industries work together

    as well as working with large number of external partners via 300 joint programs and

    customers via 30 customer technology centers around the world (Jaruzelski, Holman &

    Baker 2011).

    One of the biggest barriers to promote open innovation in the organization is to do with

    employees attitudes of not-invented here and not-sold-here, some strategies to deal with

    such attitudinal tendencies include (Lichtenthaler, Hoegl & Muethel 2011):

    Clearly communicating open innovation strategy across the organization, especially the

    benefits of opening up the innovation process to outside expertise.

    Demonstrated top management support: senior executives have to be champions and

    role models of open innovation strategy and simply providing lip services is not going to

    work.

    Establishing incentive/reward systems: need to reduce the traditional emphasis on

    internal-only innovation process and develop both monetary and non-monetary reward

    mechanism (i.e., granting open innovation award, providing opportunities to work in the

    partner organization for some time (especially in a different location/country) for open in-

    novation practice.

    Fostering pro-open innovation environment by working on organizational culture and

    structure.

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    Information Systems for Competitive Advantages 33

    One of the excellent/prominent examples or leaders of successfully implementing open

    innovation strategy is Mozilla Corporation, which has developed an open-source and free

    web browser: Firefox (currently at its 14.0.1 version and accounts for more than 24% ofweb browsers market) (Wikipedia 2012). It has extensively relied on external people (a

    broader group of volunteers) outside the firm for creative ideas, development of products,

    and decision making (in fact the number of outside contributors is much larger than that

    of internal people). What are some recipes for Mozillas huge success of open innovation

    strategy? Michelle Baker, Chairperson and former CEO of Mozilla Corporation provide

    with some answers (reported in Mendonca & Sutton 2008):

    Effectively managing the mode of participation: setting up frameworks where people

    can get involved in a very relaxed/decentralised way; having discipline in certain areas (i.e.,

    programming codes going into the Firefox); putting quality control process in place; clearly

    specifying where input is needed; giving people the feeling of ownership thus inspiring

    their desire for creating an open, participatory and safe Internet.

    Balancing internal people and outside volunteers: you need both groups. Without the

    former Firefox wont be an established force while without the latter the Firefox project

    wont last for long.

    Having transparent and distributed decision-making process: decision-making process

    is unrelated to employment status (non-employees can also take part in the decision-making

    process).

    Having the confidence that giving people control or voice in an elegant manner can

    create innovations and generate good opportunities (even revenue).

    Open management style: giving up some control and turning people loose (of course

    you need to figure out appropriate space and range) could bring in great results beyond

    expectation. Leaders of the organization also need to have the courage to acknowledge

    they are not perfect and admit when they are wrong!

    At the same time, by drawing on the experiences of successful open-source innovation

    initiatives (i.e., Wikipedia, ATLAS particle detector, Firefox web browser, Sun Microsys-

    tems Solaris operating systems, and others), Bughin, Chui & Johnson (2008) present sug-

    gestions for effective open innovation management:

    Attracting and motivating co-creators/contributors: organizations need to effectively

    understand motivations of contributors and provide the right incentives to the right people.

    Participants are largely interested in making a contribution and seeing it become a reality.

    And many contributors do enjoy non-financial rewards, such as fun, fame/recognition, and

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    34 Managing Information Systems: Ten Essential Topics

    altruism. Trust and brand affinity are also important influencing factors. People generally

    dont want to work with brands/firms they dont trust or like.

    Appropriate structure for participation: projects/problems need to be broken down intosmaller ones and let contributors work parallel on different pieces.

    Having governance mechanism to facilitate co-creation: clear rules, leadership, and

    transparent processes for setting goals and resolving conflicts should be established and

    clearly communicated.

    Quality assurance: a quality assurance process should be put into place.

    In addition, managing risks of open innovation is another critical issue. One typical

    risk is intellectual property (IP). Organizations need to clearly understand potential IP risksand the investments/costs associated with identified risks, and could take measures such as

    establishing IP sharing agreement or/and rewards/risks sharing arrangement to deal with IP

    issues (Alexy & Reitzig 2012; Bughin, Chui & Johnson 2008). Updating & maintaining

    open source code and providing technical support to users are also needed to be looked at

    (Pearlson & Saunders 2010, p. 340).

    2.4.1.1 Googles way of innovation management

    Google is one of leaders in innovation management. What are some of its best practices?

    Googles Executive Chairman and former CEO Eric Schmidt provides us with some in-

    sights (reported in Manyika 2008):

    Believing the notion of wisdom of crowds argument: groups make better decisions than

    individuals, especially when the group are selected to be among the smartest and most

    interesting people.

    Having different views and always questioning/challenging established ways of doing

    thing: how can we do in different and better ways?

    Imposing a deadline: a good combination of flexibility and discipline is required, and

    both of them are essential.

    Perfecting the art of encouragement: we believe the best ideas dont come from exec-

    utives.

    Providing people with time for new ideas: we allocate 20% time for people to pursue

    their ideas.

    Having small and undirected teams for innovation and give people space and time for

    thinking and reflection: we believe innovation always has been driven by a person or a

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    Information Systems for Competitive Advantages 35

    small team that has the luxury of thinking of a new idea and pursuing it. . . Innovation is

    something that comes when you are not under the gun. . . .

    2.4.1.2 Amazons way of innovation management

    Amazon, which developed the innovated and most successful B2C e-commerce model, is

    another great example of innovation management. Some things organizations can learn

    from Amazon regarding innovation management include (Dumont, Kaura & Subramanian

    2012: The Authors Own Knowledge):

    Having business systems (can be easily broken into simpler sub-systems) and architec-

    ture (could be organized by simply plugging in modules and components) designed for

    rapid product development and quick responding to changes: Amazon has been success-

    ful in venturing into different areas and dealing with huge number of customers without

    diminishing service quality

    Having customer-centric mind-set: Amazon and its Zappos.com are examples of cus-

    tomer centric business-they provide what customers want and even beyond that. . .

    Having a good balance between control & speed and between vertical & horizontal

    integration to achieve differentiation and accelerate product cycles as well as venturing

    into new areas (especially adjacent markets).

    2.4.1.3 Apples way of innovation management

    It could be argued that Apples way of innovation management centres on two perspectives:

    Steve Jobs innovation leadership

    User experience innovation developed through innovative product designs

    2.4.2 When does it make sense to be an early IS/IT adopter?

    Another important and highly debated topic in innovation strategy management is when

    organizations should be early adopter of new technologies. Companies like eBay (online

    auction), Yahoo (Internet directory), and Apple computer (software/hardware) got there

    first and leveraged their first-mover/early adopter competitive advantage. Companies such

    as Citibank (ATM), Sony (video tape), Chemdex (B2B digital exchange), Netscape (Inter-

    net browser), lost their first-mover advantages to late movers. Intel (microchip), AmericaOnline (Internet marketing), and Google (online search engine) are some good examples

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    36 Managing Information Systems: Ten Essential Topics

    of companies who were later movers but gained success over earlier adopters by being the

    best (Turbanet al. 2006, p. 592).

    The first mover in an industry has the advantage of being the first to offer a productor service to the market. This can help create an impression that the firm is the pioneer

    or the initiator in the customers mind. In addition this firm will be able to capitalise on

    the demand for the product or service until another firm enters the market (Turban et al.

    2006, p. 591). However, first movers take the risk that new goods and services may not be

    accepted by the market. Some suggested factors that determine the success or failure of the

    first mover strategy include (Turbanet al. 2006, p. 591):

    Size of the opportunity: big enough opportunity for just one firm and the company is

    big enough for the opportunity

    Commodity products: simple enough to offer but hard to differentiate, i.e. books and

    airline seats. Products such as clothes and restaurants are more easily differentiated by later

    movers with better features and services encouraging a switch to late movers.

    Be the best: in the long run, best-mover advantage not first-mover advantage determines

    the market leader, such as Apples iPhone, Googles search engine, Amazons e-commerce

    platform.

    In the long term, organisations have to keep on being innovative and investing in re-

    search and development (R & D) to stay ahead of the competition or even survive in the

    market. In fact, firms who are very active in innovation and seriously invest into their R

    &D are top performers. Some top spenders on R & D include: Toyota, General Motors,

    Ford, Honda, Volkswagan in the Auto industry; Pfizer, Johnson & Johnson, Roche Hold-

    ing, GlaxoSmithKline, Novartis, Sanofi-Aventis, AstraZeneca, Merck in the Health Care

    industry; Nokia, Samsung, IBM, Intel, Panasonic, Cisco Systemsin the Computing and

    Electronics industry; Microsoft in the Software and Internet industry, and Siemens in the

    Industrials sector (Jaruzelski & Dehoff 2008; 2010; 2011; Jaruzelski, Loehr & Holman

    2012). On the other hand, it is argued the success in innovation isnt really about how

    much money you spend but about how you spend (you need to spend wisely so you do bet-

    ter with less). For example the most innovative firms identified in the 2010 & 2011 Global

    Innovation 1000 study (reported in Jaruzelski & Dehoff 2011 and Jaruzelski, Loehr & Hol-

    man 2012 respectively) (such as in 2010 Apple (invested US$ 1,782 million/ 2.7% sales

    revenue into R & D activities), Google (3,762 million/12.8%), 3M (1,434 million/5.4%),

    and GE (3,939 million/2.6%); and in 2011 Apple (US$ 2.4 billion/2.2%), Google (5.2 bil-

    lion/13.6%), 3M (1.6 billion/5.3%), Samsung (9.0 billion/6.0%) are serious about investing

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    Information Systems for Competitive Advantages 37

    into R & D but they are not top spenders on R & D (such as in 2010 Roche Holding (9,466

    million/21.1%), Pfizer (9,413 million/13.9%), Novartis (9,070 million/17.9%), Microsoft

    (8,714 million/14.0%; in 2011 Toyota (9.9 billion/4.2%), Novartis (9.6 billion/16.4%),Roche Holding (9.4 billion/19.6%), Pfizer (9.1 billion/13.5%)). Other factors influencing

    the success of innovation management include (Jaruzelski & Dehoff 2010; 2011; Jaruzel-

    ski, Loehr & Holman 2012): top managements innovation skills and attitude, innovation

    process (including effective management of ideas generation and the process of from idea

    generation to product development), alignment between innovation strategy and business

    strategy, and pro-innovation culture (i.e., strong customer focus and customer experience

    orientation, passion and pride for products and services offered). Among these five factors,

    top managements innovation skills and attitude is the most important one. If top leaders

    are not willing to and not good at innovation, then the chance of the success of organiza-

    tional innovation efforts will be very slim, and they will not take the lead or do a good in

    developing innovation culture, establishing innovation process, and pushing the alignment

    between innovation strategy and business strategy.

    While established brands do help organizations in the marketplace, it is the continuous

    innovation efforts have provided them with sustainable growth and competitive advantage.

    It is particularly true in some industries (such as media and publishing- many examples of

    failed traditional news and referencing materials publishers as a result of emerging digi-

    tal content providers (i.e., Wikipedia, Google, Youtube and many others online players).

    Meanwhile when we are talking about innovation, we are referring not only to R & D

    for new products but also to changes and new things in the various parts of the business,

    such as business processes, customer services, marketing & sales, training & learning, tal-

    ent management, knowledge management, data collection & decision-making, design of

    organizational structure, intra-organizational & inter-organizational communications, pro-

    curement, payment systems, logistics management, among many others.

    Furthermore organizational learning (especially open learning) could be viewed as an

    important element of innovation, without effective and continuous learning and quick re-

    sponses to market changes, organizations wont be able to have the skills and knowledge

    for creative ideas. It can be said that even though the success and failure of the business is

    a result of multiple factors including management issues (such as leadership, management

    experiences and skills, decision making process, investment strategies), organizational fac-tors (such as culture, structure, processes, peoples skills), changes in the industry and in

    the marketplace, and economic conditions, the ability and commitment to continuous inno-

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    38 Managing Information Systems: Ten Essential Topics

    vation are definitely critical to the sustainable competitive advantage and long-term growth

    of the organization.

    In fact, innovation is the source of the added-values and profits, for example Chinesemanufacturers working on OEM orders typically make very slim margin while the owner

    of the intellectual property owner does much better. If an organization is able to make

    its innovation accepted as industry standard, then competitive advantages and good finan-

    cial outcomes will be flowing in easily-just looking at the competition between Googles

    Android operation system and Apples iOS (iphone operating system) for mobile devices.

    Furthermore when we are talking about using IS/IT for innovation, IS/IT alone wont

    be enough for successful innovation, and it is a joint effort of IS/IT and business (users),

    which needs a top-down push to deal with silo problems and foster cooperation (Roberts &

    Sikes 2011). On a related note, Kleiner (2012) argues that only a few firms (i.e., Amazon,

    Apple) have successfully locked down their intellectual capital (technological information),

    and most companies hope that the speed of innovation beats the risk of leaking information

    to competitors. Continuous innovation could be used for dealing with intellectual property

    issues.

    2.5 Summary

    In this chapter an important dimension of information systems, identifying competitive ad-

    vantages and enhancing competitive strategies through information systems, was discussed.

    Organisations can apply tools such as Porters five forces and value chain to analyse their

    competitive position, examine their competitive advantages, and identify relevant competi-

    tive strategies. Information systems can play a very important role in the success of organ-

    isations competitive strategies. However competitive strategies alone cannot create magic.

    In order to meet the IS/ITs unmet potential, both IS/IT and non-IS/IT executive need to

    work hard to have better understanding each others areas (Roberts & Sikes 2008). The

    transparency in the planning and execution of information systems projects should be vis-

    ible to business leaders. Accountability of information systems projects should be applied

    to both information systems and business parts in the organisation. In the next chapter,

    planning and evaluating information systems will be discussed.

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    Bibliography 39

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